Hospitals and other care providers, already concerned about the financial implications of health care reform, are feeling even more pressure to control labor costs, which in many cases are 50% or more of a provider's annual revenue. And while rewards and workplace programs are tempting targets, using them to reduce costs poses risks for talent management, particularly in an industry transforming as rapidly as health care delivery. As wages and benefit costs for nurses, physicians and other critical-skill employees continue to rise, partly due to ongoing shortages of qualified people, competition for this talent will likely intensify and pressure cost management even more.

To help hospital systems and other health care providers understand how their employee benefit programs compare to those of their competitors, Towers Watson conducted a benchmarking study of the U.S. health care provider industry that examined benefit practices and values at 45 of the largest U.S. provider organizations.

The 2014 study not only provides total benefit package values for the industry, but also details design and value analysis in the retirement and health care benefit arenas, and comparisons at each level to general industry practices. The result is rich benchmarking data for all benefit programs, as well as insight into trends evolving as a result of industry transformation.

Key findings from the research include:

  1. Health care providers have an average employer-funded benefit package of 36% of pay, which lags the general market by about 2% of pay.
  2. More than half (56%) of health care providers offer only defined contribution (DC) plans to new hires, compared to 73% of employers in the general market that take this approach.
  3. Health care providers that offer only DC plans provide 81% of the value provided by their peers in the general market that offer only DC plans.
  4. Account-based delivery of retirement benefits now dominates the industry, with 84% of health care providers offering an account-based plan as their primary method of delivering retirement income benefits.
  5. Retirement income plan values among health care providers lag the general industry by about 22%, on average (which is about 1.5% of pay), raising a question about whether the programs are sufficient to produce retirement readiness as employees reach an appropriate retirement age.
  6. The employer-funded portion of medical benefits is about 1% of pay richer in the health care provider industry compared to the general industry.
  7. Medical plan design for health care providers is very different from that of the general industry — a health care provider is more likely to design a plan that will drive domestic and developing-product utilization, which is not a factor for employers outside the health care delivery sector.
  8. Although account-based health plan offerings are less prevalent at health care providers than in the general industry, the increasing trend of offering those plans is just as high and is creating questions about domestic costs versus market costs for both providers and their employees.
  9. Sick pay and salary continuation are used by 61% of health care providers for short-term disability (STD), and many are phasing out extended-illness banks in favor of more tightly managed STD plans.
  10. Although the vacation/holiday benefit is slightly less rich than for the general industry, many organizations are targeting mid-level value for their paid-time-off programs (which include sick time) as well as considering unlimited time off for executives and management.

Our research shows that employers in other industries, looking to gain more control over their expenditures and allocate reward dollars efficiently, are increasingly turning to a total rewards approach to developing employee benefits. It's a tailor-made approach hospital systems can also use to balance their need to attract and retain crucial talent with their need to manage costs.

The right rewards for each group of employees — including pay and benefits as well as career development, training and work/life balance — are critical to attracting the best talent. Within regulatory constraints, hospital systems can use a total rewards approach to help customize their total package for various employee groups, depending on the groups' sometimes very different preferences.

For example, our survey data show that while physicians are primarily attracted to other organizations by career opportunities and challenging work, nurses are much more persuaded by pay, benefits and convenient working conditions. Similarly, when it comes to retention, job security is a major factor for nurses, while it does not even register as an issue for physicians.

The total rewards model is an important element of a strong employee value proposition, which time and again our research has found supports retention and engagement, and helps improve performance. That's one reason why hospitals designing total rewards programs need to focus more on surveying employees to understand their preferences.

Lately, health care providers — facing new requirements from the Patient Protection and Affordable Care Act to dramatically alter the way they deliver health care — are showing a growing interest in total rewards strategy and design. On the HR side, the recruitment of top talent remains critical, particularly for many hospital systems charged with hiring staff physicians in increasing numbers for the first time. Effective compensation and reward design for these doctors, who play an essential role in the quality of care mandated by the law, will be crucial as hospitals look to build new care delivery models such as accountable care organizations and patient-centered medical homes, where effective primary care is vital to success.

In today's cost-conscious environment, hospital systems need to find ways of getting more bang for their benefit buck. To manage costs effectively, providers must identify priorities, factoring the employee perspective into the equation as much as possible. They will need to make tougher choices, but they'll also be able to pioneer different approaches — new for their industry — to doing more with less budget. Providers that borrow a page from the general industry's total rewards approach to pay and benefits stand to be ahead of the curve.